Homeland Security seizes account of largest Bitcoin exchange, Mt. Gox

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For the past few years, Bitcoin exchange Mt. Gox has billed itself as the largest, safest repository for Bitcoin buying and selling. The site has weathered a number of DDoS attacks and survived the launch (and failure) of multiple rival exchanges. Last night, for the first time, it ran afoul of the United States government.

Yesterday, Mt. Gox’s major payment processor, Dwolla, notified customers that it could no longer transfer funds between Mt. Gox’s account (Mutum Sigilum) and Dwolla users’ accounts. Dwolla functions much like Paypal — you transfer funds from a BTC transaction to a Dwolla account and, if you’ve verified a bank account with Dwolla, you can then transfer the funds to and from your bank.

The warrant that DHS used to seize the funds in Mt. Gox’s Dwolla account has just been published, and it points to a significant problem with the service. As Ars Technica details, when Mt. Gox owner Mark Karpeles opened the Mutum Sigilum account with Wells Fargo, he was asked if Mutum Sigilum LLC was a business engaged in monetary services. From the warrant:

The application asks several questions; to include, “Do you deal in or exchange currency for your customer?” and “Does your business accept funds from customers and send the funds based on customers’ instructions (Money Transmitter)?” Karpeles answered these questions “no,” indicating that Mutum Sigilum LLC does not deal in or exchange money, and that it does not send funds based on customer instructions. Money transmitting businesses are required by 31 USC section 5330 to register as such with FinCEN. According to FinCEN records on May 6, 2013, neither Mt. Gox nor the subsidiary, Mutum Sigilum LLC, is registered as a Money Service Business.

Whoops.

The warrant goes on to detail how virtually all of the transactions passing through the Dwolla Mutum Sigilum account were Bitcoin-related transactions, and verifies that Mt. Gox has no other US-based account through which these transactions might be flowing. Karpeles, in other words, is in violation of some fairly serious banking laws. Worse, FinCEN issued new guidance nearly two months ago confirming that a virtual currency exchange like BTC is explicitly required to register as an MSB (Money Service Business).

The Wells Fargo account in question was opened in May 2011, transfers to and from Dwolla began in December of that year. Theoretically, Karpeles may have simply made a mistake — but the FinCEN guidance issued in early March made it very clear that virtual currencies and de-centralized convertible virtual currencies needed to comply with the regulations of the Bank Secrecy Act.

What’s this mean?

This isn’t a ruling on the legality of Bitcoins. The FinCEN document makes it clear that the users of virtual currencies are in no way required to comply with the regulations that govern MSBs. The problem here is that Mt. Gox has been in violation of US banking regulations for around 18 months. What happens next is honestly unclear. Mt. Gox offers wire transfers to and from bank accounts, provided you pay the associated wire fees, and since the company is headquartered in Japan, US banking law doesn’t apply.

Will this shake up the price of Bitcoins? So far, it hasn’t. Both Dwolla and Mt. Gox have stated that only a fraction of their respective businesses rely on each other. Dwolla doesn’t want to be tagged as the Bitcoin payment service, Mt. Gox doesn’t want its users thinking that it depends on Dwolla as a critical source of liquidity. The total amount of money seized from the Dwolla account hasn’t been revealed.

I suspect the market is taking a wait-and-see approach. For now, however, one of the simplest methods of transferring cash between an individual’s bank account and Mt. Gox is closed. Presumably, the DHS wouldn’t have elevated this to a federal warrant if they weren’t serious about pushing a criminal case, but it could also be a high-profile way to kick Karpeles in the direction of immediate compliance.

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